Preqin’s latest research examines two ways of defining emerging hedge funds (EHFs); ‘small’ first-time funds with USD300 million or less in AUM, or ‘new’ first-time funds with a three-year track record or less.
Preqin finds that each group has posted higher returns across 12-month and 3- & 5-year annualised horizons compared to the wider fund industry. ‘New’ EHFs in particular have posted higher rolling 12-month performance than the wider industry for most of the past five years. While this level of performance has historically been accompanied with a higher level of volatility, three- year volatility for ‘new’ EHFs has converged with that of the wider industry in 2017.
‘New’ EHFs show the strongest performance, returning 14.10 per cent across 12 months, and 12.22 per cent annualized over five years. In comparison, ‘small’ EHFs have added 11.91 per cent and 8.98 per cent over these time frames, and the wider industry returned 10.22 per cent and 7.71 per cent respectively. Since January 2012, ‘new’ EHFs have consistently recorded higher rolling 12-month returns compared to both ‘small’ EHFs and the wider hedge fund industry. While EHFs do show slightly higher risk metrics, three-year volatility for ‘new’ EHFs has converged with that of the wider industry in 2017, and now stands at 4.03 per cent compared to 3.70 per cent across all hedge funds.
‘New’ emerging hedge funds have significantly higher five-year Sharpe ratios (2.51) than both ‘small’ EHFs (1.56) and the wider industry (1.54). Investors prefer to invest in small funds. Seventy-two percent of active hedge fund investors will consider ‘small’ EHFs, but only 32 per cent will consider an EHF with a three-year track record or less. Funds with a three-year track record or less are more dispersed geographically: 21 per cent are based outside of North America and Europe, compared to 15 per cent across the industry as a whole.
Half of ‘new’ EHFs follow an equity strategy, above the industry average (43 per cent). Sixteen percent of ‘small’ EHFs are CTAs, compared to just 9 per cent across all hedge funds.
“After seeing outflows across 2016, improved recent returns have resulted in investor inflows to the hedge fund industry for the first time in five successive quarters in Q1 2017,” says Amy Bensted (pictured), Head of Hedge Fund Products at Preqin. “This has set the tone for emerging managers in the asset class; with the past performance of first-time funds stronger than that of the wider hedge fund industry, now could be a prime opportunity for new hedge fund managers.
“Notably, newer funds (those with a track record of three years or less) have generated strong returns, achieving higher net gains than small funds. This stronger performance may encourage institutional investors to look past the risks of these first-time funds and find opportunities with emerging managers. Indeed, the volatility of funds with a track record of three years or less has decreased and converged with that of the wider hedge fund industry, indicating that investors can access the better returns these funds may present with a comparable level of investment risk.”
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